One of the most prominent criticisms of SolarCity prior to being acquired by Tesla (NASDAQ: TSLA) was that the solar installer had a cash flow problem.
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This situation was created by the fact that SolarCity rose to become the No. 1 installer largely through its leasing model, which offered customers solar power at little to no upfront cost. But that required the company to invest its own money upfront into systems that it would subsequently monetize through lease payments and power purchase agreements (PPAs) over the course of decades.
By its own admission, SolarCity focused too heavily on growing its MW deployments, which is why it reduced its deployment guidance several times in 2016 in order to better manage cash flow. Additionally, it was on SolarCity, as the owner of the systems, to monetize the Solar Investment Tax Credit (worth 30% of the value of the system), which it did (and still does) through a convoluted system of tax equity financing. It also creates complications if the house is foreclosed on.
Tesla Powerwall 2. Image source: Tesla.
In contrast, a cash sale pulls forward the revenue recognition and the cash flow with it, while leaving it to the customer to realize the value from the tax credit. It's a much simpler model in almost every way, although the sales process is more involved. That's why it's so important for Tesla to shift to solar sales instead of leases as quickly as possible. Fortunately, Tesla is making progress.
The proportion of sales is rising
In Tesla's fourth-quarter shareholder letter, the company notes ongoing progress with the shift toward cash sales.
Data source: SEC filings.
Tesla deployed 201 MW of solar energy generation and 98 MWh of energy storage during the quarter, and the company makes it abundantly clear that "cash preservation" is far more important than MW deployment growth at this stage. Just today, Tesla announced that it had completed a large deployment in Hawaii for a 13 MW generation system combined with 52 MWh of storage, consisting of nearly 55,000 panels and over 270 Powerpacks.
Video source: Tesla.
Give it time
CEO Elon Musk reiterated on the subsequent earnings call that the energy storage market is set to take off and will likely grow at a faster rate -- perhaps twice the rate, by Musk's estimation -- than the automotive business. The energy business posted a sharp uptick in sales, jumping sequentially from $23.3 million in the third quarter to $131.4 million in the fourth quarter, but this was driven by the SolarCity deal closing with about six weeks left in the quarter.
Margins in the energy business were held back by ongoing investments in production capacity, but Tesla says it expects long-term gross margin to be comparable to the automotive business, which is to say a long-term target of 25% to 30% (automotive gross margin was 22% last quarter).
It might take a while to revamp the sales and distribution model, but continuing to emphasize sales instead of leases, as well as cash flow, is absolutely the right call.
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